Property Insight

Based on annual markets review 2019, a report by cytonn; a continued entry and expansion of international retail in Kenya has immensely boosted the real estate sector; especially the commercial sector.

However, there has been existing an oversupply of 2.8 million square feet of space, which has continued to cripple its performance.

According to the report, the sector recorded a decline in rents and occupancies by 1.5% and 4.0%, respectively, to Kshs 175.5 and 75.9% in 2019 from Kshs 178.2 and 79.8%, respectively, in 2018, attributed to the oversupply which has created a bargaining chip for retailers forcing developers to reduce or maintain their rents in order to remain competitive and attract occupants to their retail spaces.

Kenya’s Macro Economic Review

Figures for Gross Domestic Product with adjusted inflation was a drop in 2019 compared to 2018. And this slower growth in 2019 was due to:

  • Minimal agricultural activities, which recorded an average growth of 4.2% for the first 3 quarters of 2019, which is a 1.1% decline from the 5.3% for the same period of review in 2018. The slowdown in agriculture was brought forth by delayed long rains, which reduced expected yields. In the GDP’s contribution, agriculture was still the highest contributor with a solid 22.6% over the same period.
  • Decreased output in transport and electricity activities, which grew on average by 7.0% and 5.5%, respectively in the first 3 quarters of 2019, compared to the 8.6% and 7.6%, recorded in the same period of review in 2018.  Similar to agricultural sector, the electricity generation was subdued by insufficient long rains in the first and second quarters, while the transport sector was subdued by the rise in the cost of fuel/gas.
5.6%

Average in 2019

6.0%

Average in / 2018

In 2019, the real estate sector grew by 4.8% on average in the first three quarters, which is a +0.3% compared to 2018

The sector also registered a 20.3% increase in the value of buildings approved for the first nine months of the year to Kshs 121.3 bn, from Kshs 100.8 bn similar period of review in 2018.

The growth is attributable to

  • enhanced infrastructure positioning the country as a regional hub translating to additional foreign investment, Affordable housing deficit and the support accorded by the National Government to developers and buyers, in a bid to address the shortage and a stable economic expansion in general

However, there has been certain constraints on the sector, due to:

  • oversupply in the commercial office and retail sectors, insufficient access to financing and high financing cost for both developers and off-takers,  slow private sector credit growth before repealing of the interest rate cap and delays in processing of construction permits by some County Governments
4.5%

Growth rate in 2018

4.8%

Growth rate in 2019

121.3Billion

Approved buildings Value /2019

100.8Billion

Sector's value of buildings in 2018

— courtesy of cytonn Reports KNBS

What to consider when buying an apartment

Social Amenities available and their ease of access

  • From shopping areas to communal facilities

Neighborhood

  • The environment we dwell in , somehow shapes our life experiences and who we become in future. Understand beforehand, how it feels as a part of a particular community. Be considerate of the crime rate, general security layout, ease to shopping areas, and emergency hospital services, and schools as well

Building developer info

  • Don’t be too bothered with the technicalities; but looking at other similar properties in the construction company’s portfolio, can tell a lot – including the flaws many tend to hide, only to be revealed with time

Provision of Amenities and must-have features

  • Now this may not be entirely existing within the apartment block but having a provision for them is worth considering. Includes: Parking Space, Gym, Pool, High Speed Internet, Cable TV connection, Fire escape, Laundry area and common washrooms.

ROI (Return on Investment)

If you are planning to purchase an apartment for rental purpose; then calculate how much months to get back your investment cash.

If you want to buy for the purpose of resell, check based on the location and the changes for value addition, if they will add extra bucks for your resell price. Furthermore, in the event that you buy the apartment and want to sell it in future when you move either to another neighborhood or country, ensure you can make additional cash on top of the purchase price initially.

Your home should not depreciate in value over time. Instead, it ought to be the opposite and getting a place that allows for value addition is suitable

7 steps of buying a house in Kenya

Here are the steps for buying a house with ease and at the best price:

1.) Find a registered real estate agent licensed to operate in your town or area of interest. Agents with backgrounds in construction management can be of assistance too.

 

2.) Go through real estate agents’ property portfolio and single out the units that match most of  your desired criteria including: price, property square footage, bedrooms and baths available etc. Furthermore, discuss with them your preferences so they may source for your dream house.

 

3.) Once you find a house that meets your criteria, work with your agent or lawyer to make an Offer to Purchase (*Agreement of Purchase and Sale).

 

4. ) Once the seller accepts your offer and terms you can now proceed to carry out a house inspection tour. This helps you to evaluate the condition of the property.

 

6. ) For mortgage approach in home purchase, get pre-qualified with a mortgage lender to know the loan amount that would be suitable. Expect to get property appraisal, a land survey or both as well as title insurance.

 

7.) After mortgage application approval, proceed to close the title, in the presence of a property attorney; at their office or in the mortgage lending bank after a thorough review of the contract and conducting a title search for the property. The attorney also reviews all documents required by the mortgage lender.

NOTE: You have the right to inspect your new home 24 hours before the closing. This inspection is your last opportunity to inspect the house before signing the deed.

Also, note that prices of houses are usually dependent on the location of the property, with Nairobi being the most expensive locale in Kenya.

 

— courtesy of constructionkenya.com

Buying Land in Kenya

Search and inspection of the title deed

Once you have identified the piece of land that you would like to buy, you should then visit the ministry of land headquarters at the county level, to confirm the owner of the land. You will be required to carry title deed of the land to enable the research of the land. Also, by going to the ministry of land, you will be informed of any issues connected to the land. For example, maybe someone had used the land to get a loan or the land has been restricted by the court to be sold. In Kenya, a land search costs Ksh 520 and takes an average period of 6months.

 

Offers and Price negotiation

When satisfied with the results of the search and inspection of the title deed, then the seller’s advocate can prepare an offer letter. The letter of offers should contain the details of both the buyer and seller, description of the land, proposed land price and the mode of payment. To get the land at a lower price, the negotiations between the two parties must take place. A wise buyer will offer a lower price than the fixed one after the search and inspection of the land.

 

Sale agreement and deposit

Upon agreeing on the price, make sure that the sale agreement has the terms and conditions that both parties agreed on. The sale agreement is drafted by the seller’s lawyer and presented to the buyers advocate for approval. The approval of the sales agreement is followed by payment of the agreed deposit to the seller’s advocate account.

 

Land Map

You can get the land map from a local surveyor and buy a map of the property. You will get tow maps, one drawn to scale and the other one showing the neighbouring lands. each map will cost you Ksh 300 or less. However, you can visit the lands ministry which will take longer to get the maps.

 

Land Rates

Land rates are the tax imposed on every parcel of land to the county government. This is a keynote to have during the land buying process. After payment, a rates clearance certificate is issued as proof that all rates have been paid. Make sure that the seller has covered all the land rates and interests before making any transactions. Note that payment of rates is a legal responsibility of every landowner hence you ought to be committed.

 

Land Control Board

This board consists of the assistant county commissioner and the local village elders. Their main duty to protect the seller from self-destruction such as selling the land that was instructed never to be sold. Also, one cannot sell land without the wife giving consent. This means that the board will give the final consent for the land you are interested in to be sold. Note that this board meets once per month and will charge you Ksh 1000.

However, there is an optional board, special land control board( SCLB), that consists of the assistant county commissioner and the two parties only instead of waiting for the LCB. most people prefer this board since it can take up to 2 hours and you don’t have to wait for a month for the meeting to happen. The SCLB costs 5000.

 

Land Transfer

After all payments and the consent of the land control board, the seller is required to sign a land transfer form. The form should contain:

  • Correctly filled booking form
  • Official land search
  • Consent to transfer land
  • Land rates clearance form
  • Land rent certificate
  • Transfer Instrument
  • Identity card
  • KRA pin
  • Sale agreement
  • Old title deed

The old title deed should be taken to the ministry of land to change land ownership. The process takes two weeks and costs 5000.

Payment of Stamp Duty

The value of the land will determine the amount of money you will pay for stamp duty.  4% of the land value will go to the municipalities while 2% will go for reserve.

 

Post Purchase

The buyer should confirm with the ministry of land, after one week,  that the land has his or her details. If any issues, you can make corrections then go confirmed after a week

The above are the legal procedures to follow while purchasing land.

Trusted and qualified Real Estate Agencies can help with the entire process till the completion of purchase of land.

Capital Gains Tax (CGT)

This is a tax chargeable on the whole of a gain which accrues to a company or an individual upon transfer of property situated in Kenya.

This particular Tax  took effect on 1st January 2015.

Rate of tax for Capital Gains Tax

  • 5% of the net gain (Net Gain is Sales Proceeds, less the Acquisition and Incidental cost) after sale of a land or building.
  • 0% on marketable securities.

CGT is a final tax. Thus it is not subject to further taxation after payment of the 5% rate of tax.

When is Capital Gains Tax due?

CGT is due and payable on or before the date of lodgement of application documents for transfer of property at the lands office.

5%

Capital Gains Tax Rate

0%

Tax rate for marketable securities

Exemptions on Capital Gains Tax
  • Income that is taxed elsewhere as in the case of property dealers
  • Issuance by a company of its own shares and debentures
  • Disposal of property for purpose of administering the estate of a deceased person
  • Transfer of property between spouses as part of divorce settlement
  • A private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer
  • Agricultural property having an area of less than 100 acres where that property is situated outside a municipality or urban area

Rental Income Tax

This is tax payable by resident persons on residential rental income accrued or derived in Kenya where the rent income is between Kshs. 144,000 (Kshs. 12,000 per month) and Kshs. 10 million per annum. Returns are filed and tax payable on or before the 20th of the following month

*Landlords with rental income below Kshs. 144,000 or above Kshs. 10 million per year shall be required to file annual income tax returns and declare this rental income together with income from other sources.

For any month that the landlord does not receive any rent he/she shall file a NIL return.

Taxation of Rental Income depends on whether the property is residential or commercial purposes.

Residential Rental Income Tax.

It is taxed at 10% on the gross rent received and no expenses are allowed.

NOTE: Residential Rental Income Tax is a final tax. Therefore, you do not have to declare it on your annual Income Tax return.

Commercial Rental Income Tax

It is taxed at the respective annual income tax rates and filed through the annual Income Tax Returns, on or before the last day of the 6th month after the end of the accounting period (irrespective of the amount).

10%

Residential Tax Rate

20th

due date for residentials

6th

due date for commercials

Penalty for late tax filing

Date: Returns are filed and tax payable on or before the 20th of the following month.

Penalty on filing: Late filing of MRI returns attracts a penalty of:

  • 2,000 or 5% of the tax due whichever is higher for individuals
  • 20,000 or 5% of the tax due whichever is higher for corporates

Penalty on paying: 5% of the tax due and a late payment interest of 1% per month on the unpaid tax until the tax is paid in full.

Stamp Duty

Stamp duty is subject to the Agency Revenue Tax, which is a type of payment that is charged on transfer of properties, shares and stock.

It is collected by the Ministry of Lands, which has seconded the function to Kenya Revenue Authority (KRA)

Stamp duty of 1% applies to transfer of unquoted shares while 2% and 4% applies to the (valuation amount of) immovable property within rural and urban (cities/ municipalities) areas respectively

4%

for urban leaseholds

2%

for properties in rural

average rental yields rates in 2019

The rental yield observation is adapted from a Real Estate Report by Cytonn Investment,

download the report PDF here: Kenya Real Estate Retail Sector Report 2019

The report highlights, the real estate sector average total returns came in at 9% (with capital appreciation rate factored in).

Of this, average rental yields in 2019 for various property types are quoted as follow:

7.5%

Commercial Space

5.0%

Residential Development

7.3%

Mixed-use Development

7.6%

Serviced Apartments

7.0%

Average Rental Returns

2%

capital appreciation rate

However, residential and serviced apartment sectors continued to perform well in terms of rental yield, recording increase of 0.3% points and 0.2% points, (5 % and 7.6% as at 2019 from 4.7% and 7.4% in 2018).

Current Hotspots investment areas

There are pockets of value in themes such as housing for lower-middle to low-income earners in Satellite towns such as Ruiru, Athi River and Ruaka .

These areas have been observed to deliver above market rental yields, with some, such as serviced offices and serviced apartments with 13.4% and 7.6%.

Another avenue is the Mixed-use developments; where office and retail spaces recorded an average rental yields of 7.9% and 8.1 %, respectively.

 

— courtesy of cytonn Reports